Oregon Fail

Joel Kotkin
, ContributorI cover demographic, social and economic trends around the world.Opinions expressed by Forbes Contributors are their own.

There is something about Oregon that ignites something close to poetic inspiration, even among the most level-headed types. When I asked Hank Hoell recently about the state, he waxed on about hiking the spectacular Cascades, the dreamy coastal towns and the rich farmlands of the green Willamette Valley.

"Oregon," enthused Hoell, president of LibertyBank, the state's largest privately owned bank, from his office in Eugene, "is America's best-kept secret. If quality of life matters at all, Oregon has it in spades. It is a good as it gets. It's just superb."

As developer Shelly Klapper, a rare skeptic in the Beaver State, reminded me: "This is a state that buys it's own hype."

Hype or not, however, Oregon is hurting--something that's clear to even the most self-respecting narcissist. Over the past year, Oregon's economy has fallen off a cliff just about as fast as any state in the union.

A year ago, things seemed very different. Sunbelt boom states like California, Arizona and Nevada were already heading into deep recession, but green Oregon seemed oddly golden. Both its small cites and one big town, Portland, were outperforming the national norms. Oregonians saw their state as better--not only in terms of green and good, but also in terms of basic job growth.

But since last winter, Oregon's unemployment rate has soared from barely 5.5% to well over 8%, the sixth worst in the nation. Indeed, according to a recent projection by the University of California at Santa Barbara (UCSB), Oregon's jobless rate could reach close to 10% by the end of the year.

Well into 2010, Oregon's overall economy will shrink more rapidly than the nation's as a whole, notes UCSB forecaster Bill Watkins. He traces a sharp downturn there to many factors, including one of the toughest regulatory regimes in North America.

In tough times, companies generally expand in localities that are are friendly to commerce--say, states like Texas or nearby Idaho. Few would rate Oregon highly in that regard.

"Oregon is mostly a place that focuses on the enjoyment of its space, and that makes [it] very vulnerable in these conditions," Watkins says.

The other big problem has to do with a lack of economic diversity. Oregon has been through tough times before. For much of its history, the state's economy depended largely on harvesting its vast forests. Then, in the 1980s, the state developed a green bug, and decided it shouldn't chop down Mother Nature for a living.

In the ensuing decade, Oregon pioneered tough land-use regulations, curbing industries that relied on forest products and declaring war on suburban sprawl. Its main city, Portland, became the poster child of the "smart growth" movement by forcing up density, building an extensive light-rail system and restoring its urban core.

Although widely praised, these stringent regulations also drove up land prices and, ironically, prompted many middle-class residents to move away, including across the border into Washington. Businesses, rather than cluster in the state's core, continued to migrate to the outer rings; in the relatively healthy year of 2005, for example, barely 10% of Portland's office space growth took place in the central district.

"We give lip service to the economy here," admits Klapper, a longtime Portland entrepreneur and a former official with the Port of Portland. "But, really, business is not a priority here."

For a while, Klapper notes, the tech sector seemed to offer the solution. In the '80s and '90s, chip makers fleeing even higher costs in California flooded into Oregon, which was proudly dubbed the "Silicon Forest." In an unusual move, the state provided tax breaks to the chip makers, which helped. The state's suburbs also proved attractive to tech workers who could afford a far better quality of life there, in terms of schools and housing, than they could in the Golden State.

But as regulations tightened and costs to businesses and families increased, even the high-tech industry began to fade. Always a political bellwether state, Oregon has moved inexorably left, increasingly dominated by both its public sector and the particularly strong green movement. Semiconductor expansion soon started to go south--or in this case, further east (to Idaho) or across the Pacific to Asia.

Only one thing remained to drive the economy: housing. A torrent of Californians were heading north--cashing out of the overpriced Bay Area, Sacramento and Los Angeles--and buying new homes in Oregon. Some sophistos sashayed their way into trendy places like Portland's Pearl District, but many others looked to the charming smaller towns of the Willamette Valley and central Oregon.

"When all else failed, it was people moving here that kept us going," says Klapper, who was a major investor in the Pearl District renaissance. "California became our biggest industry."

This dependence turned into a debilitating addiction. When in 2007, the great California housing bubble collapsed, the inflow of people and dollars dropped off. Meanwhile, the remnants of lumber industry fell victim to the housing bust.

Nowhere are the effects of this clearer than in Bend, a spectacular town of 75,000 located amid volcanic peaks in the center of the state. Californians had considered Bend a favorite spot for second homes and relocation. About a year ago, notes real estate appraiser Steve Pistole, prices were rising 2% a month, while those in Portland were "only" rising 8% a year.

But to visit Bend now is to be in the eye of housing hurricane, with nearly deserted housing tracts, woefully empty hotels and residential second-home developments. Unemployment in the housing arena, according to the UCSB, could reach 15% next year.

We can also expect a further slide in housing prices. Oregon's bubble, notes analyst Wendell Cox, inflated later than California's, so prices, which have dropped more than 10% in the last year, could fall by that much or more in the next.

Yet despite all these problems, many Oregonians remain optimistic. Some of this seems, at least fundamentally, a reflection of ideology. The inevitable huge surge of "green jobs" promised by the Obama administration has long been an article of faith in the state; it seems something like a story we'd tell our children to put them to sleep. State officials, for example, speak wistfully of replacing a recently shuttered Korean-owned Hynix chip plant with a facility to make solar panels.

The bad news is this: 49 other states--some of which don't pose such strong regulatory challenges--also hope to bring home some of these green jobs. So if business logic applies, the new factories that manufacture wind turbines, propellers or solar panels will end up in states like North Dakota or Texas, which have been the most successful, thus far, at attracting other manufacturing jobs.

So what trail should Oregon blaze now? Pistole, the real estate appraiser, says it may be time to think small. Places like Bend, he notes, already attract former Silicon Valley veterans who like living close to trout streams, hiking trails and golf courses.

"There is no magic bullet for Oregon," says Pistole, who himself moved from California just three years ago. "But there could be lots of onesies, twosies, mom-and-pops. People still want to live here. We have to make it synergistic to live where you want and still make money. That's the way we need to go."

Some entrepreneurs, like 38-year-old Michael Taus, are already setting up such small shops, some of them in their homes. A recent arrival from Los Angeles, Taus made it big as one of the founders of Rent.com, which was sold to eBay in 2005. He's only lived in Bend for a few months, but he has already launched his own start-up and consults for several other local firms.

Taus believes others of his generation will want to establish businesses in Oregon, lured by both its lifestyle and affordability. Some of the new business may be in software, Taus says, but others could sprout in specialty agriculture, wood products and other industries.

"People are here for a reason. There's a good amount of talent, and you can get more here," he says earnestly. "There's a great potential. We just have to get down to business."

Joel Kotkin is a Presidential Fellow in Urban Futures at Chapman University and executive editor of newgeography.com. He is finishing a book on the American future and writes a weekly column for Forbes.